3

Redemption of Preference Shares

In general, a company cannot return its share capital to the shareholders. However, the Companies Act stipulates certain provisions on this matter. Section 100 of the Companies Act necessitates special resolution for reduction of share capital. According to Section 100,a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorized by its articles, by special resolution, reduce its share capital subject to confirmation by the Court (now Tribunal). A special resolution under this section is in this Act referred to as “a resolution for reducing share capital.”

3.1 ISSUE AND REDEMPTION OF PREFERENCE SHARES

Subject to the provisions of Section 80 of the Companies Act, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed. Some of the important provisions of this section are as follows:

1. No such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption.
2. No such shares shall be redeemed unless they are fully paid. To redeem partly paid preference shares, a Call has to be made to make them fully paid.
3. The premium, if any, payable on redemption shall have been provided for out of the profits of the company, or out of the company’s share (security) premium account, before the shares are redeemed.
4. Where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall out of profits which would otherwise have seen available for dividend, be transferred to a reserve fund, to be called the “capital redemption reserve fund (account)”, a sum equal to the nominal amount of the shares redeemed.
5. Subject to the provisions of this section, the redemption of preference shares there under may be affected on such terms and in such manner as may be provided by the articles of the company.
6. The redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorized share capital.
7. Where in pursuance of this section, a company has redeemed or is about to redeem any preference shares, it shall have power to issue shares up to the nominal amount of the shares redeemed or to be redeemed as if those shares had never been issued; and accordingly, the share capital of the company shall not be deemed to be increased by the issue of shares in pursuance of this sub-section. (Section 611).
8. Provided that, where new shares are issued before the redemption of the old shares, the new shares shall not, so far as it relates to stamp duty, be deemed to have been issued in pursuance of this subsection unless the old shares are redeemed within one month after the issue of the new shares.
9. The capital redemption reserve (CRR) account may be applied by the company in paying up unissued shares of the company to be issued to the members of the company as fully paid bonus shares. CRR cannot be utilized for any other purpose.
10. Notwithstanding anything contained in this Act, no company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1996, issue any preference share which is irredeemable or is redeemable after the expiry of a period of 20 years from the date of its issue.
11. According to Section 80A, every preference share issued before the commencement of the Companied (Amendment) Act 1988, which is irredeemable, shall be redeemed by the Company within a period not exceeding 5 years from such commencement, (i.e., on or before 1993).
12. If it is not redeemable before the expiry of 10 years from the date of issue thereon in accordance with the terms of its issue and which had not been redeemed before such commencement, shall be redeemed by the company on the date on which such share is due for redemption or within a period of not exceeding 10 years from such commencement, whichever is earlier. That means all the existing redeemable preference shares shall be redeemed on their due dates or within 10 years (i.e., on or before 1998).
13. Provided that, where a company is not in a position to redeem any such share within the aforesaid period and to pay the dividend, if any, due thereon (such shares being here after referred to as unredeemed preference shares), it may with the consent of the Tribunal, issue further redeemable preference shares equal to the amounts due.

3.2 DETERMINATION OF THE AMOUNT OF NEW ISSUE

After familiarizing with the legal provisions with respect to issue and redemption of preference shares, we have to understand the term “minimum fresh issue of shares”. In general, companies decide to utilize all the permissible reserves, for the redemption and for the balance amount, if any required, to make new issue of shares. The main objective is to minimize the quantum of new issue of shares:

That minimum new issue shall be made

1. At par (or)
2. At a premium (or)
3. At a discount

The amount of such new issue is ascertained by using the following formula:

Illustration 3.1

Model: Minimum fresh issue of shares

From the following particulars, determine minimum fresh issue of shares when the fresh issue is (i) at par; (ii) at a premium of 10% and (iii) at discount of 10%.

Redeemable preference shares to be redeemed are 3,00,000; premium payable on redemption is 5%; securities premium in balance sheet is 20,000. Revenue reserve in balance sheet is 1,30,000.

Solution

(i) When fresh issue is made at par:

1. Write the formula:
   
2. Substitute the values (given in problem) in the formula:

   Minimum fresh issue

   

(ii) When fresh issue is made at a premium of 10%:

1. Write the formula:
   
2. Substitute the values:
   

   Face value of fresh issue = 1,50,000

   Premium on the fresh issue = 1,50,000 ×

   = 15,000

(iii) When fresh issue is at 10% discount:

1. Write the formula:
   
2. Substitute the values in the formula:

   Minimum fresh issue

   

   Face value of fresh issue = 1,83,333

   Discount on fresh issue = 1,83,333 ×

   = 18,333

   Hence, net proceeds = 1,83,333 − 18,333

    

   = 1,65,000

NOTE: Adjustment for fresh issue of shares:

The fresh issue will be adjusted for higher ten, if the face value is 10 and adjusted for higher hundred, if the face value is 100.

To illustrate, in the above illustration—when fresh issue is issued at discount—the number of shares will be 18,340 if the issue price is 10,the number of shares to be issued will be 18,400 if the face value is 100. It is to be noted here that adjustment should not be made to the nearest ten or hundred rupees. It must be adjusted for higher ten or higher hundred as illustrated above. The reason is that it will result in complications as the entire permissible reserve is already utilized to ascertain fresh issue.

Journal entries to be passed for issue and redemption of preference shares:

I: Entries for receiving cash:

 

II: Entries for Transfers:

3.3 STAGES IN SOLVING PROBLEMS

The following are the important stages in solving problems with respect to redemption of preference shares:

3.3.1 Stage 1—Ascertainment of Amount of Capital Redemption Reserve (CRR)

Preference shares may be redeemed in one of the following ways:

1. Out of revenue reserves
2. Out of the proceeds of a fresh issue of shares
3. Combination of (i) and (ii)

The amount to be transferred to CRR may be ascertained by using the following formula:

Amount to be transferred to CRR = Face value of preference shares to be redeemed −Amount received from new issue of shares (excluding premium)

In case if new issue is not given in the problem, minimum fresh issue must be ascertained before ascertaining the transfer to CRR.

NOTE: If revenue reserves are used, an equal amount has to be transferred to CRR.

3.3.2 Stage 2—Premium on Redemption of Preference Shares

Premium on the redemption of preference shares, if any, has to be provided in the following order:

1. Source (i): Securities premium existing in the balance sheet
2. Source (ii): Premium on new issue of shares
3. Source (iii): Revenue reserves

3.3.3 Stage 3—Tackling “Cash Problem”

Cash position may not be strong even in reputed companies. Cash problem, i.e., shortage of cash, may arise in certain companies. Shortage of cash is to be determined in the following way:

 

Step 1:	Face value of preference shares to be redeemed:	…
Step 2:	Add: Premium payable on redemption:	…
Step 3:	Total cash required for redemption	xxx
Step 4:	Less: Final call received on partly paid redeemable preference shares	…
		xxx
Step 5:	Less: Cash received from new issue of shares or debentures	…
		xxx
Step 6:	Less: Cash or bank balance given in the balance sheet	…
Step 7:	Shortage of cash to redeem preference shares	xxx

Shortage of cash is determined one of the following orders, which are based on assumption:

1. Investments in balance sheet are sold at par
2. Trade debtors are realized at par
3. Bank overdraft is utilized to the possible limit

3.3.4 Stage 4—Transfers and Payment

Step 1:	Revenue reserves that are used for redemption of preference shares have to be transferred to CRR account.
Step 2:	Premium on redemption has to be provided out of appropriate source of accumulated profits.
Step 3:	These two, i.e., redeemable preference share capital and premium payable on redemption, have to be transferred to each preference shareholders’ account individually.
Step 4:	In general, cash payment has to be made to the shareholders.

3.3.5 Stage 5: Bonus Issue of Shares

If bonus issue is mentioned in the question, then bonus issue has to be made. Bonus issue is primarily made out of CRR. In case CRR is insufficient, capital profits has to be utilized for issue of bonus shares. Even then, if it is not sufficient, revenue profits can also be utilized for issue of bonus shares. In general, bonus shares are issued to the existing equity shareholders in an appropriate ratio, to be decided by the Board of Directors.

At this stage, one has to understand the terms “revenue profits” and “capital profits” and their inherent characteristics constituents:

Revenue profits (or) profits that are transferable to CRR are as follows:

1. It generally represents or forms part of general reserve
2. It is dividend equalization reserve
3. It is also a reserve fund
4. It represents revenue portion of profit on sale of investment and fixed assets
5. Profits available for dividend
6. Profits that can be transferable to CRR are revenue profits
7. Workmen’s compensation fund
8. Insurance fund
9. Debenture redemption fund
10. Profit and loss account
11. Workmen’s accident fund
12. Debenture redemption account

Capital profits (or) profits which cannot be transferable to CRR are as follows:

1. It represents only capital reserves and not general reserves
2. Profits prior to incorporation
3. It represents capital portion of profit on sale of fixed assets and investments
4. Securities premium account
5. Depreciation reserve
6. Forfeited shares account
7. Existing CRR
8. Development rebate reserve

Illustration 3.2

Model: Redemption of preference shares out of revenue reserves

Pap & Dev Ltd. issued 1,00,000 equity shares of 10 each and 7,500 redeemable preference Shares of 100 each, all shares being fully called and paid up on 31 March 2011. Profit and loss account showed undistributed profits of 5,00,000 and general reserve stood at 4,00,000. On 1 April 2011, the directors decided to redeem the existing preference shares at 110 utilizing as much profits as would be required for the purpose.

You are required to pass the necessary journal entries in the books of the company.

Solution

NOTE:

1. General reserve account has to be exhausted for creating CRR account and any balance required has to be utilized from P&L A/c.

   In this question, amount equal to nominal value is 7,500 × 100— 7,50,000. General reserve account stood at 4,00,000 Balance to be made from P&L at 3,50,000.

2. As securities premium account is not given in the question, premium payable on redemption of preference shares has to be adjusted against P&L A/c.

   In this question, premium is (110 - 100) 7,500 = 75,000.

   Now, the necessary journal entries have to be passed in the order as shown below:

Illustration 3.3

Model: Redemption of preference shares—At Par and out of profits

The following is the extract of balance sheet of Shiva Co. Ltd. as on 31 December 2010:

 

Share Capital
1,00,00 Equity shares of 10 each	10,00,000
20,000 redeemable preference shares of 100 each}	20,00,000
Capital reserve	8,00,000
General reserve	7,50,000
Profit & Loss A/c	20,00,000

The Company exercises its option to redeem preference shares on 1 January 2011. The Company has sufficient cash.

You are required to pass journal entries relating to redemption.

Solution

BASIC CALCULATION:

Amount available in general reserve = 7,50,000

Balance to be met from P&L A/c = ( 20,00,000 − 7,50,000) = 12,50,000

 

Illustration 3.4

Model: Redemption of preference shares—At premium and out of profits

The balance sheet of Krishna Ltd. as on 31 March 2011 was as follows:

On the above date, the preference shares were redeemed at a premium of 10%.

You are required to:

1. Pass journal entries
2. Construct the amended balance sheet

Solution

NOTE: As general reserve is not given in the problem, entire amount for redemption is to be utilized in P&L A/c only.

 

Illustration 3.5

Model: Redemption at par and out of fresh issue

M/s Rukmani Tex Ltd. has part of its share capital as 8,000 redeemable preference shares of 50 each. When the shares became due for redemption, the company decided that the whole amount will be redeemed out of a fresh issue of equal amount of equity shares of 10 each.

You are required to pass the journals entries in the books of the company.

Solution

As the entire amount required for redemption of preference shares will have to be met by fresh issue of equity shares, first the amount needed is determined as follows:

Value of preference shares to be redeemed = 8, 000 × 50

∴ Number of fresh issue of equity shares

Illustration 3.6

Model: Redemption at par partly out of profits and partly out of fresh issue

M/s Leela Agro Ltd. has part of its share capital in 5,000 12% redeemable preference shares of 100 each. The general reserve of the company shows a credit balance of 6,00,000. The directors decided to utilize 70% of the reserve in redeeming the preference shares and the balance is to be met from the proceeds of the fresh issue of sufficient number of equity shares of 10 each.

Give journal entries to record these transactions.

Solution

BASIC CALCULATIONS:

1. CRR to be created = 70% of the reserve
   (Partly out of profits) = 70% of 6,00,000 = 4,20,000
2. Number of fresh issue of shares:

   Balance = ( 5,00,000 – 4,20,000) = 80,000

             

Illustration 3.7

Model: Redemption of preference shares at par—Fresh issue at premium

On 31 March 2011, the balance sheet of Radha Ltd. stood as follows:

On the above date, the preference shares have to be redeemed. 30,000 Equity shares of 10 each are issued at 11. The company also issued 10% debentures totaling 4,00,000. The shares and debentures are fully subscribed and paid for. The preference shares are duly redeemed.

You are required to give journal entries and the balance sheet after redemption.

Solution

BASIC CALCULATION:

Total amount required for redemption = 6,00,000

Amount realized on issue of fresh shares = 3,00,000

∴ Balance required = 3,00,000

3,00,000 has to be transferred to CRR out of profits, i.e., from P&L A/c in this question.

 

Illustration 3.8

Model: Redemption at a premium—Partly out of profits and partly out of fresh issue of shares at par

Srinivas Ltd. have part of their share capital in 4,000 10% redeemable preference shares of 100 each. The Company decided to redeem the preference shares at premium of 10%. The general reserve of the company stood at 5,00,000. The directors decided to utilize 50% of the reserve in redeeming the preference shares and the balance is to be met from the proceeds of fresh issue of sufficient number of equity shares of 10 each. The premium on redemption is to be met from the year’s profit and loss appropriation account.

Give journal entries to record the above transactions.

Solution

 

Illustration 3.9

Model: Redemption at premium and fresh issue at premium

M/s Subbu Ltd. has 6,000 8% redeemable preference shares of 100 each fully paid. The Company decides to redeem the pref. shares on 31 March 2011 at a premium of 10%.

The Company makes the following issues:

1. 40,000 Equity shares of 10 each at a premium of 10%
2. 2,000 9% Debentures of 100 each

The issue was fully subscribed and allotments were made. The redemption was duly carried out. The Company has sufficient profits.

Give the necessary journal entries in the books of the company.

Solution

 

Illustration 3.10

Model: Redemption of preference shares at premium—Partly out of fresh issue of shares and partly out of profits.

Raj Gopal Ltd. has an authorized capital of 10,00,000 comprising 3,000 8% redeemable preference shares of 100 each and 70,000 equity shares of 10 each.

The preference shares are redeemable on 31 March 2011 at a premium of 10%.

The summarized balance sheet was as follows:

The Board has passed necessary resolutions duly and the following transactions took place:

1. To provide cash for redemption of preference shares, the investments were sold for 50,000 and 15,000 equity shares of 10 each were issued to the existing shareholders at 12 per share payable in full. All moneys were duly redeemed.
2. The redeemable preference shares were duly redeemed.

You are required to give necessary journal entries and the amended balance sheet.

Solution

Basic calculations:

1. The requisite amount for redemption:
   Number of preference shares × Nominal value = 2,000 × 100 = 2,00,000
2. The requisite amount for premium on redemption:
   10% of 2,00,000 = 20,000
3. Amount to be transferred from general reserve and P&L A/c:

   = Requisite amount for redemption — Equity shares issued for redemption

   = 2,00,000 – (15,000 shares × 10)

   = 2,00,000 1,50,000 = 50,000.

Illustration 3.11

Model: Issue of bonus shares

Sunderraj Ltd. issued 10,000 8% redeemable preference shares of 100 each at par on 1 July 2003, redeemable at the option of the company on or after 30 June 2009 partly or fully.

Redemptions were made out of profits as follows:

1. 2,000 Shares on 30 June 2009 at par
2. 2,500 Shares on 31 December 2009 at 10% premium
3. Remaining shares on 30 June 2010 at a premium of 5% making a fresh issue of 4,000 equity shares of 100 each at a premium of 10%

On 30 June 2010,the company also decided to capitalize 50% of its capital redemption reserve by issuing bonus shares of 10 each fully paid at a premium of 2 per share.

Pass necessary journal entries to record the above transactions in the books of the company.

Solution

BASIC CALCULATIONS:

1. Amount required for redemption transferred out of profits to capital redemption reserve A/c:

    

   Total amount required for redemption =	10,00,000
   Less:
   (a) On 30 June 2009: 2,00,000
   (b) On 31 December 2009: 2,50,000
   (c) On 30 June 2010: 4,00,000	8,50,000
   	1,50,000

2. Ascertainment of bonus:

    

   Transfer to capital redemption reserve on 30 June 2009:	2,00,000
   Transfer to capital redemption reserve on 31 December 2009:	2,50,000
   Transfer to capital redemption reserve on 30 June 2010:	1,50,000
   	6,00,000

∴ Bonus at 50% of capital redemption reserve

Illustration 3.12

Model: Utilization of profit and loss A/c balance for redemption—Restricted use

Rajabather Ltd. has an issued share capital of 1,300 9% redeemable preference shares of 100 each and 45,000 equity shares of 10 each.

The preference shares are redeemable at a premium of 10% on 1 April 2011.

The Company’s balance sheet as on 31 March 2011 was as follows:

To carry out the redemption of preference shares, the Company decided:

1. To sell all investments at 30,000
2. To finance part of the company from company funds, subject to leaving a balance of 23,000 in the P&L A/c
3. To issue sufficient equity shares of 10 each at a premium of 20% per share to raise the balance of funds required

The preference shares were redeemed on due date and the issue of equity shares was fully subscribed.

You are required to pass the necessary journal entries to record the above transactions and prepare the balance sheet of the company soon after the redemption is completed.

Solution

 

Determination of equity shares to be issued:
Profit − Loss A/c (As shown in balance sheet)		80,000
Less: Loss on sale of investments 37,000 − 30,000 =	7,000
Amount to be retained in the company	= 23,000	30,000
Amount to be transferred to CRR =		50,000
Nominal amount of equity shares to be issued:
(1,300 × 100 − 50,000) =		80,000

∴ Number of shares to be issued

Illustration 3.13

Model: Untraceable shareholders

The following is the summarized balance sheet of Jaya Ltd. as on 31 March 2011:

The preference shares were redeemed on 7 April 2011 at a premium of 10%. A bonus issue of one equity share for every five shares held was made on the same date. No trace could be found of the holders of 25 preference shares.

You are required to give the necessary journal entries and construct the resultant balance sheet in a summarized form.

Solution

NOTE: In this question, some shareholders having 25 preference shares are shown as not traceable.

The amount due to such untraceable shareholders should not be included in the journal entries.

That amount should be shown in the balance sheet under the head “Current Liabilities” till they claim their dues.

 

Illustration 3.14

Model: Minimum fresh issue of shares

Redeemable preference shares to be redeemed: 5,00,000

Premium on redemption: 8%

Divisible profits available: 1,00,000

Fresh issue of equity shares of 10 each is to be made at 20% premium

From the above data, you are required to calculate:

1. Minimum fresh issue of shares
2. The amount of issue

Solution

1. Determination of minimum fresh issue:

   Write the formula:

   Minimum fresh issue = Redeemable pref. shares to be redeemed – Divisible profits – General Reserve – Securities premium

   Substitute the available data in the formula,

            = 5,00,000 − 1,00,000 − N.A − N.A.

            = 4,00,000

                    or

            = 4,00,000 ÷ 10 = 40,000 shares

2. To determine the amount of issue, we have to work out the following steps:

    

   Step 1:	Premium on minimum issue ( 4,00,000 × 20%) (Ref: (a))	= 80,000
   Step 2:	Add: Existing premium	= NIL
   Step 3:	Total premium (Step 1 + Step 2)	= 80,000
   Step 4:	Requisite amount for premium redemption of preference shares 5,00,000 × 8%	= 40,000
   Step 5:	As total premium (Step 3) is higher than the requisite amount for premium on redemption of preference shares (Step 4), no need to apply the special equation to determine the amount of fresh issue. (If the total premium is not sufficient to pay off premium on redemption, special equation has to be applied to ascertain the amount of fresh issue.)
   Step 6:	Hence, the minimum amount of fresh issues of shares is 4,00,000 (Ref: (a)).

Illustration 3.15

Model: Minimum fresh issue of shares (Application of equation)

 

Redeemable preference shares	= 10,00,000
Premium on redemption	= 10%
Divisible profits available	= 1,50,000
Balance in general reserve	= 1,00,000
Securities premium	= 50,000

Fresh issue is to be made at 5% premium. From the above data, you are required to determine:

1. Minimum fresh issue of shares
2. The amount of issue

Solution

1. Determination of minimum fresh issue:

   Write the formula:

   Minimum fresh issue = Redeemable pref. shares to be redeemed – Divisible profits – General reserve – Securities premium

   Substitute the figures in the formula,

        = 10,00,000 − 1,50,000 − 1,00,000 − 50,000

        = 7,00,000

2. To determine the amount of issue, the following sequence of steps has to be followed:

    

   Step 1:	Premium on minimum issue ( 7,00,000 × 5%)	= 35,000
   Step 2:	Existing securities premium (Given)}	= 50,000
   Step 3:	Total premium (Step 1 + Step 2)	= 85,000
   Step 4:	Requisite amount for premium on redemption of pref. shares ( 10,00,000 × 10%)	= 1,00,000
   Step 5:	As the total premium (Step 3) is lower than the requisite premium on redemption of preference shares (Step 4), we have to apply the equation to find out the amount of fresh issue.

STAGE II: Application of equation to find the amount of fresh issue:

 

Step 1:	Assume the new issue to be made as x.
Step 2:	Write the formula:
	Face value of redeemable pref. shares + Premium payable/on redemption = Securities premium in balance sheet + General Reserve + Divisible Profits + x × x × Percentage of premium on new issue
Step 3:	Substitute the figures in the equation, { 10,00,000 + 1,000,000} = { 50,000 + 1,000,000 + 1,50,000 + x + x × (x)5%}
Step 4:	11,00,000 = 3,00,000 + x + x or 0.05x
Step 5:	11,00,000 – 3,00,000 = x + 0.5x
Step 6:	7,00,000 = 1.5x
Step 7:	= 6, 66, 666. 67
Step 8:	∴ Minimum amount of fresh issue = 6, 66, 670

Illustration 3.16

Model: Minimum fresh issue—Fresh issue to be made at a discount

 

Redeemable preference shares:	12,00,000
Premium on redemption:	5%
Profit & Loss A/c balance:	4,00,000
General reserve balance:	2,80,000
Securities premium A/c:	40,000

Fresh issue is to be made at a discount of 10%

From the above data, you are required to ascertain the amount of fresh issue of shares applying the equation.

Solution

 

Step 1:	Assume the new issue as x
Step 2:	Face value of premium redeemble + on pref. shares redemption = Securities premium + General reseve + P & L A/c + x − 0.1x
	( 12, 00,000 + 60,000) = ( 40,000 + 2, 80,000 + 4, 00,000 + x − 0.1x)
Step 3:	12, 60,000 = 7, 20,000 + 0.9x
Step 4:	12, 60,000 − 7, 20,000 = 0.9x
Step 5:	5, 40,000 = 0.9x
Step 6:	x = 6, 00,000
Step 7:	Fersh issue to be made = 6, 00,000

 

Illustration 3.17

Model: Minimum fresh issue of shares at premium

The balance sheet of Manu as on 31 March 2011 is as follows:

On the above date, it was decided to redeem the preference shares at a premium of 10%. The directors has decided that only the minimum number of fresh equity shares of 100 each at a premium of 5% be issued to provide for redemption of such preference shares as could not otherwise be redeemed. You are required to give the necessary journal entries and prepare the balance sheet soon after redemption.

 

[B.Com (Hons). Modified]

Solution

STAGE I: Ascertainment of minimum fresh issue of shares (Apply the equation) Assume minimum fresh issue as ‘x’.

Assume minimum fresh issue as ‘x’.

Equation: Face value of redeemed pref. shares + Premium payable on redemption = Securities premium + P & L A/c + x + 0.05x

Substitute the figures,

( 2,00,000 + 20,000) = ( 9, 700 + 1, 20,000 + x + 0.05x)

2,20,000 = 1,29,700 + 1.05x

2,20,000 − 1,29,700 = 10.5x

1.05x = 90,300

x = 90,300/1.05 = 86, 000

∴ Number of shares

STAGE II:

 

STAGE III:

 

Illustration 3.18

Model: Minimum fresh issue of shares at a discount

The balance sheet of M/s Laxmi Ltd. as on 31 March 2010 was as follows:

The company decided to redeem the preference shares at a premium of 5%. To enable the redemption to be carried out, the company decided to issue after carrying out, the necessary formalities required under law, sufficient number of new equity shares at a discount of 10%.

You are required to give the necessary journal entries and prepare the balance sheet soon after the redemption

Solution

Important notes:

1. 4,000 6% Preference shares cannot be redeemed. The reason being that they are only partly paid and not fully paid.
2. Premium payable on redemption = 2,00,000 5/100 = 10,000. This amount alone can be paid out of securities premium. Hence 10,000 alone can be shown as premium payable on redemption in formula
3. CRR is to be created from dividend equalization reserve.

Step 1:	Ascertainment of minimum new issue of shares:
	Assume new issue to be made as x.
	Write the equation:
	{Face value of redeemed pref. shares + Premium on redemption} = {Securities premium (Part) + Revenue reserves + x − 0.1x}
	Substitute the figures in the equation, we get
	(2, 00,000 + 10,000)
	2, 10,000 = ( 1, 20,000 − 0.9x)
	New issue to be made = 1, 00,000
	Number of new equity shares

Step 2:     Calculation of CRR:

Nominal value of new equity shares	=	1,00,000
Less: Discount at 10% on 1,00,000	=	10,000
∴ Net proceeds	=	90,000

CRR = Face value of redeemable pref. shares – Net proceeds

         = 2,00,000 – 90,000

         = 1,10,000

This amount is to be created from dividend equalization reserve.

Step     3:

Journal entries:

 

Step     4:

 

Illustration 3.19

Model: Forfeiture and re-issue of redeemable preference shares

Following is the balance sheet of M/s Thomas Co. Ltd. as on 31 March 2011 in a summarized form:

The redeemable preference shares were redeemed on the following basis:

1. Further 1,500 equity shares were issued at a premium of 10%.
2. Expenses of fresh issue of shares 4000.
3. Out of 100 preference shares, holders of 80 shares paid the call money before the date of redemption. The balance of 20 shares were forfeited and they were re-issued as fully paid shares on receipt of 1,500 before redemption.
4. Preference shares were redeemed at a premium of 10% and share premium was utilized in full for this purpose.

You are required to pass journal entries and prepare summarized balance sheet after redemption.

Solution

Before preparing the balance sheet, bank balance has to be determined by preparing bank A/c as follows:

Illustration 3.20

Model: Redemption by conversion

A: Redeeming preference shares by converting them into equity shares at a premium:

Journal entry:

 

(i) Redeemable preference share capital A/c	Dr.	…
To Equity Share Capital A/c			…
To Securities Premium A/c			…
(Redemption of preference shares by converting into equity shares of … at … % premium)
(ii) Profit & Loss appropriation A/c	Dr.	…
To Capital Redemption Reserve A/c			…
(Transfer of amount from P&L A/c to CRR)

Example: ABC Ltd. redeemed 10,00,000 preference shares by converting them into equity shares of 100 each at 25% premium.

Pass journal entries for the redemption.

Solution

 

B: Redemption of preference shares by converting them into equity share at a discount:

Journal entry:

 

Redeemable Preference Share Capital A/c	Dr.	…
Discount on Issue of Shares A/c	Dr.	…
To Equity Share Capital A/c			…

(Redemption of preference shares by converting into equity share issued at discount)

Example: XYZ Ltd. redeemed 9,00,000 preference shares by converting them into equity shares issued at 10% discount. Pass journal entries.

Solution

 

C: Redemption at a premium by converting them into equity shares at a discount:

Example:

PQR Ltd. redeemed 2,000 preference shares of 100 each at a premium of 12.50 per share by converting into equity shares of 10 each at a discount of 10%. Pass necessary entries for redemption.

Solution

 

Illustration 3.21

Model: Bonus issue—Out of general reserve redemption of pref. share at premium

VRS Ltd. had 1,00,000 equity shares of 10 each fully paid and 50,000 9% redeemable preference shares of 10 each fully paid, redeemable at a premium of 10%.

The company had a credit balance of 4,00,000 on profit and loss account and 5,00,000 on general reserve.

The Company resolved:

1. To issue 30,000 equity shares of 10 each at 12 per share in order to provide part of the funds for the redemption of preference shares.
2. To redeem preference shares
3. To make a bonus issue of one share for every two held by the existing equity shareholders from the general reserve. The resolutions were carried into effect.

You are required to pass journal entries and prepare ledger accounts and also show the share capital and reserve of the company as they would appear in its balance sheet after the completion of the redemption.

Solution

STAGE I: Recording journal entries:

 

STAGE II: Preparation of various ledger accounts:

 

STAGE III: Preparation of balance sheet (Extract)

 

Illustration 3.22

Model: Redemption of preference shares at a premium and issue of bonus shares out of CRR

The following is the summarized balance sheet of Swamy Ltd. as on 31 December 2010:

On 5 January 2011, the preference shares were redeemed at a premium of 20 per share. The company could not trace the shareholders of 500 preference shares. On 7 January 2011, a bonus issue paid equity share for five shares held was made.

You are required to pass the necessary journal entries in the books of Swamy Ltd. and also prepare balance sheet, soon after redemption.

Solution

 

Illustration 3.23

Model: Redemption of preference shares rights issue

The balance sheet of Veera & Co. Ltd. as on 31 March 2011 disclosed the following data:

Authorized Share Capital:
3,000 9% Redeemable Preference Share of 100 Each	3,00,000
10,000 Equity Shares of 100 Each	10,00,000
Paid-Up Capital:
1,500 9% Redeemable Preference Shares of 100 Each	1,50,000
7,500 Equity Shares of 100 Each, 80 Paid Up	6,00,000
Capital Reserve	70,000
General Reserve	1,80,000
Securities Premium	10,000
Profit & Loss A/c	75,000

On 6 April 2011, the preference shares were to be redeemed at a premium of 10% for the purpose of redemption, the company decided to:

1. Issue 2,500 10% Debentures of 100 each
2. Convert the partly paid-up equity shares into fully paid up without requiring the shareholders to pay for the same
3. Issue fully paid rights shares of 100 each at a premium of 20 % per share in the proportion of one share for every five shares held

You are required to give necessary journal entries to record the above transactions.

Solution

 

 

Issue and redemption of preference shares can be made by a company in accordance with the provision of Section 80 and Section 80A of the Companies Act.

A company may issue if the Article of the Company authorizes or a special resolution has to be passed to amend the articles to make the issue.

Only fully paid preference shares can be redeemed.

Redemption can be possible only out of revenue profits and not from capital profits.

Premium on redemptions is a capital loss, which can be met from “securities premium account”.

Available profits for redemption have to be transferred to capital redemption reserve and CRR may be used to issue fully paid bonus shares.

Redemption of preference shares will not affect the authorized capital.

Minimum fresh issue of share: At the time of redemption, all the permissible reserves have to be utilized first and then only new issue of shares for the balance amount can be made. The formula for determining such minimum issue is:

Minimum issue to be made = Face value of redeemable preference shares + Premium payable on redemption — Securities premium in balance sheet — Reserve in balance sheet (If new issue is at premium)

Important stages involved in solving problems relating to redemption of preference shares:

1. Ascertainment of CRR
2. Making provision for premium on redemption of preference shares
3. Determination of cash position for redemption
4. Ensuring transfer and cash payment
5. Dealing with bonus issue, if any.
6. Problems with respect to redemption refer Illustrations 3.1 to 3.23

Capital Redemption Reserve: A reserve to which a sum equal to the nominal amount of the shares redeemed is transferred out of profits. After the redemption, this account will take the place of redeemable preference share capital.

Minimum Fresh Issue of Shares: A scheme of new issue of shares in which companies may utilize all the permissible reserves first and only then, this may make issue of new shares for the needed balance.

Untraceable Shareholders: Shareholders who are not traceable to make payment at the time of redemption. Amount due to such shareholders will be shown in the balance sheet on the liabilities side under the heading “Current Liabilities” till their settlement.

Redemption by Conversion: A method of converting preference shares into equity shares to meet the requisite amount for redemption.

Premium on Redemption: The excess amount paid to preference shareholders at the time of redemption. Such premium has to be provided out of the securities premium account or out of other profits.

QUESTION BANK

I: State whether the following statements are true or false

1. A company cannot return its share capital to the shareholders according to Section 100 of the Companies Act.
2. Redeemable preference shares can be redeemed if such shares are partly paid.
3. Redeemable preference shares can be redeemed out of capital reserve.
4. Premium on redemption of preference shares can be provided out of securities premium A/c.
5. Creation of, or transfer of, amount to capital redemption reserve need not be necessary for redemption.
6. CRR can be utilized to issue fully paid bonus shares to equity shareholders.
7. Redemption of preference shares will reduce the authorized capital.
8. A company cannot issue preference shares which can be redeemed beyond a period of 20 years.
9. Profits available for dividend relate to revenue profits of a company.
10. The term “proceeds” represents the amount received including the amount of share premium on the new issue of shares.
11. Premium on redemption is a capital loss.
12. Bonus shares involve cash flow immediately.
13. Depreciation reserve is a capital profit.
14. Dividend equalization reserve is a capital profit.
15. Companies exhaust all the permissible reserves before launching new issue of shares for redemption.
16. The proceeds of fresh issue of debentures can be utilized for redemption of redeemable preference shares.
17. The amount due to “untraceable shareholders” should be first recorded in the books of journal.
18. Premium on issue of debentures can be utilized to pay premium on redemption of preference shares.
19. Workmen’s compensation fund can be transferred to CRR at the time of redemption.
20. CRR, already existing in the books, can be to utilized as profits available for dividend.

Answers:

1. True
2. False
3. False
4. True
5. False
6. True
7. False
8. True
9. True
10. False
11. True
12. False
13. True
14. False
15. True
16. False
17. False
18. True
19. True
20. False

II: Fill in the blanks with apt word(s)

1. A company limited by shares, can issue redeemable preference shares, only if it is authorized by its_______.
2. Redeemable preference shares cannot be redeemed unless they are_______.
3. Redeemable preference shares can be redeemed either out of the of _______ the company or out of proceeds of _______.
4. Premium on redemption of preference has to be provided either out of the _______ of the company or out of the _______.
5. An amount equal to the face value of the preference shares to be redeemed must be transferred to _______.
6. Capital redemption reserve can be utilized to issue fully paid _______ to equity shareholders.
7. Redemption of preference shares will not _______ the authorized.
8. U/s 80-5 (A) of the Companies Act, a company cannot issue irredeemable preference shares or shares which can be redeemed beyond a period of _______ years.
9. All the _______ profits are not included for the purpose of redemption.
10. After redemption, CRR will take the place of _______ share capital.
11. Bonus shares will not involve any _______ immediately.
12. Dividend equalization reserve is _______ profit.
13. Profit prior to incorporation is _______ profit.
14. Workmen’s compensation fund is _______ profit.
15. Securities premium A/c is _______ profit.
16. At times, “current assets” include (presumption) _______.
17. In case of calls-in-arrears, redeemable preference shares cannot be _______.
18. ABC Ltd. has issued 5,000 equity shares of 100 each at a premium of 20 each. For redemption, the amount that would be taken as “proceeds of fresh issue” is _______.
19. XYZ Ltd. has issued 5,000 8% preference shares of 100 at a discount of 20% the amount for “proceeds of fresh issue” would be _______.
20. At times, reserve fund is also allowed to be transferred to _______.

Answers:

1. Articles of Association
2. fully paid up
3. profits; fresh issue of shares
4. profits; securities premium A/c
5. capital redemption reserve
6. bonus shares
7. reduce or affect or alter
8. 20
9. capital
10. redeemable preference
11. cash flow
12. revenue
13. capital
14. revenue
15. capital
16. cash/bank balance
17. redeemed
18. 5,00,000
19. 4,00,000
20. CRR

III: Multiple choice questions—Choose the correct answer

1. Sections 80 and 80 A of the Companies Act provide for the issue and redemption of
   1. redeemable reference shares
   2. equity shares
   3. debentures
   4. bonds
2. A company limited by shares can issue preference shares which can be redeemed only if authorized by
   1. the board of directors
   2. the articles of the company
   3. court order
   4. ordinary resolution
3. In case preference shares are redeemed out of profits otherwise available for dividend, a sum equal to the face value of shares should be transferred to
   1. capital reserve
   2. capital redemption reserve
   3. general reserve
   4. none of these
4. A company cannot issue irredeemable preference shares which can be redeemed beyond a period of
   1. 20 years
   2. 10 years
   3. 5 years
   4. none of these
5. Amount due to “untraceable shareholders” may be
   1. transferred to P&L A/c
   2. kept as general reserve
   3. transferred to CRR
   4. shown as “Current Liabilities” in the balance sheet
6. At times, transfer to capital redemption reserves can be made from
   1. general reserve
   2. capital reserve
   3. P&L A/c
   4. none of these
7. Premium on redemption of preference shares shall be met out of
   1. CRR
   2. P&L A/c
   3. capital reserve
   4. securities premium A/c

Answers:

 

1. (a)	2. (b)	3. (c)	4. (a)
5. (d)	6. (a)	7. (d)

1. Explain the term: Redeemable preference shares.
2. Enlist the important provisions of Section 80 of the Companies Act.
3. Explain the provisions envisaged in Section 80-5 (A) of the Companies Amendment Act 1996.
4. What do you understand by “proceeds of fresh issue of shares”?
5. What are the various ways to provide for “premium on redemption”?
6. Enlist the profits available for transfer to CRR.
7. Enumerate the various profits which cannot be transferred to CRR.
8. Explain the meaning of “minimum fresh issue of shares”.
9. How would you ascertain “any shortage of cash” for redemption purpose?
10. Write a short note on “untraceable shareholders”.
11. How would you deal with “calls-in-arrears” as the time of redemption?
12. Pass journal entries for redemption of preference shares at a premium.
13. Give the necessary journal entries for conversion of preference shares into equity shares.
14. Give journal entries with respect to bonus shares (both declaration and issue in proportion).
15. In 2010,ABC Ltd. redeemed 90,000 preference shares by converting them into equity shares issued at 10% discount. Pass journal entry

1. Explain the provisions of Sections (i) 80 (ii) 80 A (iii) 80 A (1) and (iv) 80-5(A) of the Companies Act.
2. Enlist the various items of revenue profits that can be transferred to capital redemption reserve.
3. Name the various items of capital profits which cannot be transferred to CRR.
4. Explain the procedure with respect to redemption of preference shares.
5. How will you determine the minimum fresh issue of shares to be made (i) at par; (ii) at premium and (iii) at discount?
6. How will you ascertain capital redemption reserve?
7. Explain the procedure involved in redemption of partly paid-up preference shares.
8. What do you mean by redemption by conversion? Discuss the various ways adopted with an illustration.
9. Is there any difference between “rights issue for redemption” and “bonus issue for redemption”? Substantiate you answer.

 

 

1. The balance sheet of Ext Ltd. as on 31 March 2011 was as follows:

On that date, the preference shares were redeemed at par. You are required to pass journal entries and also prepare balance sheet soon after the redemption.

 

[Madurai Kamaraj University
Adapted and Modified]

[Ans: Transfer to capital redemption reserve:

(i) Out of P&L A/c: 60,000; (ii) Out of general reserve: 2,40,000

Total of balance sheet (after redemption): 12,15,000]

[Model: Redemption at premium out of profits]

 

2. The balance sheet of “YE” Ltd. on 31 March 2011 was as follows:

On that date, the preference shares were redeemed at a premium of 10%. You are required to pass journal entries and give the amended balance sheet.

 

[Madras University Modified]

[Ans: Transfer to CRR: 8,00,000; Amended balance sheet total: 47,20,000]

[Model: Redemption at par out of fresh issue]

 

3. PQR Ltd. as part of its share capital has 8,000 redeemable preference shares of 100 each. When the shares became due for redemption, the company decided that the whole amount will be redeemed out of a fresh issue of equal amount of equity shares of 50 each.

Show the journal entries in the books of the company.

[Ans: Hint: Number of equity shares to be issued: 16,000 shares]

[Model: Redemption at a premium, partly out of profits and partly out of fresh issue]

 

4. Cool Home Ltd. have part of their share capital in 5,000 9% redeemable preference shares of 100 each. The company decided to redeem the preference shares at a premium of 10%. The general reserve of the company shows a credit balance of 6,00,000. The directors decided to utilize 60% of the reserve in redeeming the preference shares and the balance is to be met from the proceeds of fresh issue of sufficient number of shares of 10 each. The premium is to be met from the year’s Profit & Loss A/c.

Give journal entries to record the above transactions.

[Ans: General reserve to CRR: 3,60,000; Number of equity shares to be issued: 14,000 of 10 each]

[Model: Redemption at a premium and fresh issue at a premium]

 

5. A company has 5,000 8% redeemable preference shares of 100 each fully paid. The company decided to redeem the shares on 31 March 2011 at a premium of 10%. The company made the following issues:

1. 30,000 Equity shares of 10 each at a premium of Re 1 each
2. 2,000 10% Debentures of 100 each

The issue was fully subscribed and allotments were made. The redemption was duly carried out.

The company had sufficient profits.

You are required to give necessary journal entries.

[Ans: Hint: Requisite amount from P&L appropriation A/c to CRR: 2,00,000; Payment due on redemption: 5,50,000]

[Model: Redemption at par and fresh issue at premium]

 

6. The following is the summarized balance sheet of X Ltd. as on 31 March 2011:

On that date, the preference shares had to be redeemed. For this purpose 30,000 equity shares of 10 each were issued as 11. The company also issued 9% debentures totaling 4,50,000. The shares and debentures were immediately subscribed and paid for. The preference shares were duly redeemed.

You are required to pass journal entries in the books of X Ltd. and prepare the balance sheet after redemption.

[Ans: Total amount required to redeem pref. shares: 6,00,000; Amount ofnew issue ofshares: 3,00,000; the balance 3,00,000 transferred to CRR out of P&L A/c; Balance sheet total: 30,30,300]

[Model: Redemption at premium partly out of fresh issue and partly out of profits]

 

7. ABC Ltd. has an authorized capital of 40,00,000 comprising 10,000 8% redeemable preference shares of 100 each and 3,00,000 equity shares of 10 each.

The preference shares are redeemable on 15 April 2011 at a premium of 10%.

The summarized balance sheet of the company as on 31 March 2011 was as follows:

The necessary resolutions were duly passed and the following transactions were carried through:

1. To provide cash for repayment of redeemable pref. shares, the investments were sold for 2,50,000 and 25,000 equity shares of 10 each were issued to existing shareholders at 20% premium. All moneys were duly received.
2. The preference shares were duly redeemed. You are required to pass necessary journal entries in the books of ABC Ltd. and prepare the amended balance sheet.

[Ans: 1,50,000 from general reserve and 1,00,000 from P&L A/c transferred to CRR; Total of amended balance sheet: 21,10,000]

[Model: Redemption at premium partly out of fresh issue of preference shares and partly out of profits]

 

8. Vijay Ltd. had issued 8,00,000 equity shares of 10 each fully paid and 48,000 redeemable preference shares of 100 each fully paid. On 31 March 2011, the profit and loss account showed an undistributed profit of 8,00,000 and the general reserve account stood at 22,40,000.

On 1 April 2011, the directors decided to issue 24,000 6% preference shares of 100 each and to redeem the existing preference shares at 110 each utilizing as less profits as possible for the purpose.

You are required to pass necessary journal entries in the books of Vijay Ltd.

[Ans: 22,40,000 out of general reserve and 1,60,000 out of revenue profits to be transferred to CRR]

[Model: Issue of bonus shares]

 

9. The Rock Fort Ltd. issued 4,000 8% redeemable preference shares of 100 each at par on 1 January 2004, redeemable at the option of the company on or after 31 December 2010,partly or fully.

Redemptions were made out of profits as follows:

1. 600 shares on 31 December 2010 at par
2. 800 shares on 31 March 2011 at 10% premium
3. Remaining shares on 30 June 2011 at a premium of 5% by making a fresh issue of 2,000 equity shares of 100 each at a premium of 10%

On 30 June 2011, the company also decided to capitalize 50% of its CRR by issuing bonus shares of 100 each fully paid at a premium of 25 per share.

You are required to pass the necessary journal entries in the books of The Rock Fort Ltd.

[Ans: Amount equal to nominal value of pref. shares to be transferred to CRR on 31 December 2010: 60,000 (out of P&L A/c); on 31 March 2011: 80,000; on 30 June 2011: 60,000;

Number of bonus shares to be issued: 800]

[Model: Issue of bonus shares]

 

10. Krishan Ltd. has an authorized capital of 5,00,000 comprising 1,00,000 9% redeemable cumulative preference shares of 1 each and 4,00,000 ordinary shares of 1 each. The preference shares are redeemable on 1 April 2011 at 1.05 per share. The summarized balance sheet of the company as on 31 December 2010 was as follows:

The necessary resolutions were duly passed and the following transactions carried through on the dates stated:

1. All the investments were sold for 36,000
2. 40,000 ordinary shares of 1 each were issued to the existing shareholders at 1.25 per share payable in full forthwith and duly paid

On 1 April 2011, in order to provide cash towards the redemption of preference shares, the above two took place. On 30 June 2011, the preference shares were duly redeemed and on 31 August 2011, a bonus issue of ordinary shares was made at the rate of one new share for every ten shares held.

You are required to pass necessary journal entries and prepare balance sheet.

[Ans: CRR: 60,000; Bonus shares: 24,000;

Balance sheet total: 4,30,400]

[Model: Restriction on utilization of P&L A/c for redemption]

 

11. The following is the summarized balance sheet of a company as on 31 March 2011:

On 1 April 2011, the company decided to redeem preference shares at a premium of 5%. In order to facilitate the redemption of preference shares, it was decided:

1. To sell the investments for 3,00,000
2. To finance part of the redemption from the company’s funds subject to leaving balance of P&L A/c of 2,00,000
3. To issue sufficient equity shares of 10 each at a premium of 2 per share to raise the balance of funds required

The preference shares were redeemed on due date and equity shares were fully subscribed. You are required to pass necessary journal entries and prepare the balance sheet after redemption.

[Ans: CRR: 4,50,000; Balance sheet total: 65,90,000]

[Model: Untraceable shareholders]

 

12. The following is the summarized balance sheet of a company as on 31 December 2010:

The preference shares were redeemed on 1 January 2011 at a premium of 20 per share, the whereabouts of the holders of 60 such shares not being known. At the same time, a bonus issue of equity shares was made at par, one share being issued for every three shares held out of the capital redemption reserve A/c.

You are required to pass the journal entries to record the above transactions and prepare the balance sheet after redemption:

[Ans: CRR: 80,000; Bonus shares: 65,000;

Balance sheet total: 3,32,200]

[Model: Minimum fresh issue of shares:

 

13. A company wants to redeem its 10,000 6% preference shares of 10 each, fully paid at 10% premium. The ledger accounts show the following balances:

Securities premium 2,000 P&L A/c (Cr.) 5,000

The directors redeemed the shares by making minimum fresh issue of equity shares of 10 each at a premium of 5%. Give journal entries.

[Ans: CRR: 6,660; Proceeds of fresh issue: 98,007]

[Model: Minimum fresh issue of shares]

 

14. Balance sheet of M/s Joshi Ltd. as on 31 March 2011 is as follows:

The preference shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be made to the extent required under the Company’s Act for the purpose of this redemption. The shortfall in funds for the purpose of redemption after utilizing the proceeds of the fresh issue are to be met by taking a bank loan. Show journal entries.

[Ans: New issue of equity shares: 6,00,000 Bank loan : 10,50,000]

[Model: Minimum fresh issue of shares at a discount]

 

15.The balance sheet of AX Ltd. as on 31 March 2011 was as follows:

On the above date, the Company decided to redeem the preference shares at a premium of 5%. To enable the redemption to be carried out the company decided to issue, after carrying out the necessary formalities required under law, sufficient number of new equity shares at a discount of 10%.

You are required to pass the necessary journal entries and prepare the balance sheet after redemption

[Ans: CRR: 5,50,000; New issue to be made: 5,00,000]

[Model: Minimum fresh issue of shares at premium

 

16. The following is the summarized balance sheet ofAZ Ltd.

It was decided to redeem both the classes of preference shares at a premium of 5%. The company issued equity shares of 100 each at a premium of 10% as were necessary to provide cash for redemption. The issue was fully subscribed and all the moneys were received. You are required to give journal entries and prepare the balance sheet.

[Ans: CRR: Nil; Balance sheet total: 14,82,500]

[Model: Forfeiture and re-issue of redeemable preference shares]

 

17. Following is the summarized balance sheet of BX Ltd. as on 31 December 2010:

The redeemable preference shares were redeemed on the following basis:

1. urther 2,250 equity shares were issued at a premium of 10%.
2. Expenses of fresh issue of shares 25,000.
3. Out of 250 preference shares, holders of 200 shares paid the call money before the date ofredemption. The balance of 50 shares were forfeited and they were re-issued as fully paid shares on receipt of 2,500 before redemption.
4. Preference shares were redeemed at a premium of 10% and share premium was utilized in full for the purpose.

You are required to pass journal entries and prepare summarized balance sheet after redemption:

[Ans: (i) Bank A/c to balance b/d: 1,29,000 (ii) Balance sheet total: 42,04,000]

[Model: Redemption at a premium and bonus issue out of general reserve]

 

18. Goodluck Co. Ltd. had 60,000 equity shares of 10 each fully paid and 30,000 6% redeemable preference shares of 10 each fully paid, redeemable at a premium of 10%. It had a credit balance of 2,40,000 on P&L A/c and 3,00,000 on general reserve.

The company resolved:

1. To issue 18,000 equity shares of 10 each at 12 per share in order to provide part of the funds for the redemption on preference shares
2. To redeem the preference shares
3. To make a bonus issue of one share for every two held by the existing shareholders from the general reserve. The resolutions were carried into effect

You are required to pass journal entries and prepare balance sheet after the completion of redemption.

[Ans: Transfer to CRR from profits: 1,20,000; General reserve to bonus holders: 3,00,000; Balance sheet extract: Share 10,80,000; Securities premium: 6,000; CRR: 1,20,000; P&L A/c: 1,20,000; Bank OD: 1,14,000) [Model: Redemption at a premium and issue of bonus shares out of CRR]

 

19.The following is the summarized balance sheet of Sri Sai Ltd. as on 31 December 2010:

On 7 January 2011, the preference shares were redeemed at a premium of 4 per share. The Company could not trace the holders of 9,600 preference shares. On 10 January 2011, a bonus issue of one fully paid equity share for four shares held was made.

Show the journal entries to record the above transactions and also prepare balance sheet, after redemption.

[Ans: Transfer of profits to CRR: 8,80,000; Balance sheet total: 55,42,400]

[Model: Rights issue for redemption]

 

20. The following information is extracted from the balance sheet of Full Moon Ltd as on 30 December 2010

Particulars
Authorized Share Capital:
20,000 9% Redeemable Preference	20,00,000
Shares of 100 Each
4,00,000 Equity Shares of 10 Each	40,00,000
Paid-Up Capital:
10,000 9% Redeemable Preference Shares of 100 Each	10,00,000
3,20,000 Equity Shares of 10 Each, 7.50 Paid Up	24,00,000
Capital Reserve	4,00,000
General Reserve	14,00,000
Securities Premium	48,000
Profit & Loss A/c	5,00,000

On 6 January 2011, the preference shares were redeemed at a premium of 5% for the purpose of redemption, the company decided to:

1. Issue 16,000 6% debentures of 100 each
2. Convert the partly paid up equity shares into fully paid up without requiring the shareholders to pay for the same
3. Issue of fully paid rights shares of 10 each at a premium of 2 per share in proportion of one share for every four shares held

Give necessary journal entries to record the above transactions.

[Ans: CRR: 10,00,000;

Issue of rights share: Equity share capital A/c: 8,00,000;

Securities premium A/c: 1,60,000]

 

 

21. The following is an extract from the balance sheet of a company as on 31 March 2011:

Particulars
Share Capital:		20,00,000
40,000 9% Preference Shares of 50
Fully Paid
2,00,000 Equity Shares of 10 Each	15,00,000
7.50 Per Share
Called Up
Less: Calls Unpaid	15,000	14,85,000
Securities Premium Account		1,00,000
General Reserve		12,00,000
Calls in Advance (Final Call On Equity Shares)		5,000

On 1 April 2011, the Board of Directors decide the following:

1. The fully paid preference shares are to be redeemed at a premium of 5% in May 2011, and for the purpose, 1,00,000 equity shares of 10 each are to be issued at par to be paid for in full on application in April 2011
2. The final call of 2.50 per share is to be made in July 2011
3. The 2,000 equity shares owned by X, an existing shareholder, who failed to pay the allotment money of 2.50 per call, were forfeited in the month of June 2011

The above decisions were duly complied with according to the time schedule laid down. The amount due on the issue of fresh equity shares and on final call were duly received except from Y, who has failed to pay the final call money also. Those shares of Y were forfeited in the month of August 2011.

Of the total shares forfeited, 3,000 were issued to Z in September 2011, credited as fully paid at 9 per share, the whole of X’s shares being included.

You are required to pass journal entries in the books of the company to record these transactions and show the relevant items on the liabilities side of the balance sheet (necessary extracts) according to the form prescribed by the Companies Act, 1956. Assume that the resources required for payment are available.

[Ans: CRR: 10,00,000;
Extracts on liabilities side of B/S:
Equity shares fully paid 29,90,000; Forfeited
shares A/c: 5,000; CRR: 10,00,000; Capital
reserve: 7,000; General reserve: 2,00,000]

 

22. The following balances are appearing in the books of Excellent Ltd:

Particulars
Redeemable Preference Share Capital	20,00,000
Calls-in-Arrear (Redeemable Pref. Shares)	40,000
General Reserve	12,00,000
Securities Premium	1,60,000
Development Rebate Reserve	8,00,000

It is ascertained that:

Preference shares are of 100 each fully called, due for immediate redemption at a premium of 10%.

Calls-in-arrear are on account of final call on 2,000 shares held by four members whose whereabouts are not known. Balance of general reserve and securities premium is to be fully utilized for the purposes of redemption and the short fall is to be made good by issue of equity shares of 10 each at par.

The redemption of preference shares was duly carried out. You are required to give the journal entries and the relevant extracts from the liabilities side of the balance sheet as they would appear after the redemption is carried out.

 

[C.A. (Inter). Modified]

[Ans: Amount to CRR: 11,60,000; Preference shares redemption suspense A/c: 2,20,000]

 

23. The following balances were extracted from the books of Fortune Ltd. as on 31 March 2011:

Particulars
10,000 9% Redeemable Preference Shares of	10,00,000
100 Each, Fully Called Up}:	30,000
Less: Calls-in-Arrear @ 20 Per Share On 1,500 Shares}:	9,70,000
Capital Reserve	50,000
General Reserve	2,50,000

The preference shares were redeemed on 1 April 2011 at a premium of 5 per share. The company issued 65,000 equity shares of 10 each at par, for the purpose of redeeming the preference shares, which were fully subscribed and duly allotted.

You are required to show the journal entries showing the transactions relating to the redemption of shares and the relevant extracts on the liabilities side of the balance sheet after such redemption.

 

[C.A. (Inter). Modified]

[Ans: CRR: 2,00,000]

 

24. ABC Ltd. has the following balance sheet as on 31 March 2011:

The preference shares are to be redeemed at 10% premium. Fresh issue of equity shares

is to be made to the extent it is required under the Companies Act for the purpose of this redemption. The shortfall in funds for the purpose of the redemption after utilizing the proceeds of the fresh issue are to be met by taking a bank loan.

Show the journal entries.

 

[C.A. (Inter). Modified]

[Ans: CRR: 1,50,000]

 

25. Sun Rise Ltd. issued share capital of 30,000 12% redeemable preference shares of 20 each and 2,00,000 equity shares of 10 each. The preference shares are redeemable at a premium of 5% on 1 January 2011.

As at 31 December 2011, the company’s balance sheet stood at as follows:

In order to facilitate the redemption of preference shares, it was decided

1. To sell the investments for 1,50,000
2. To finance part of the redemption from the company funds subject to leaving of balance in P&L A/c 1,00,000.
3. To issue sufficient equity shares of 10 each at a premium of 2 per share to raise the balance of funds required

All the above-mentioned decisions were fully carried out and the preference shares were duly redeemed.

You are required to prepare:

1. Journal entries to record the above transactions
2. A memorandum balance sheet as on completion of redemption

[I.C.W.A. (Inter). Modified]

[Ans: Fresh issue: 37,500 shares;
Balance sheet total: 32,95,000]

 

26. The following is the balance sheet of Moonlight Ltd as on 31 December 2010:

On 1 January 2011, the Company redeemed the preferences shares at a premium of 10%. In order to pay off the preference shareholders, it sold investments realizing 1,90,000. All payments were made except to shareholders of 120 who could not be traced.

On 1 April 2011, the company issued fully paid bonus shares in the ratio one for every share held on that date. Give the necessary journal entries and prepare the balance sheet after redemption.

 

[I.C.W.A. (Inter). Modified]

[Ans: CRR: 2,00,000; Bonus shares: 4,00,000; Balance sheet total: 13,71,320]

 

27. Following is the balance sheet of Crescent Ltd. as on 30 June 2011:

On that date, the Board of Directors decided to redeem the preference shares at a premium of 10% and to sell investments at its market price of 2,40,000. All payments were made except to shareholders holding 300 shares who could not be traceable.

They also decided to issue sufficient number of equity shares of 10 each at a premium of Re 1 per share, required after utilizing the P&L A/c leaving a balance of 3,00,000. Premium on redemption is required to be set off against security premium account. You are required to show the journal entries and the balance sheet of the company after redemption.

 

[C.S. (Inter). Modified]

[Ans: CRR: 5,40,000; Issue of new equity
shares: 9,00,000; Balance sheet total:
38,19,000]

 

28. The following is the balance sheet of Seven Stars Ltd. as at 31 December 2011:

On 30 May 2011, the Board of Directors decided to redeem the preference shares at a premium of 10% and to sell the investments at its market price of 1,20,000. They also decided to issue sufficient number of equity shares of 10 each at a premium of 1 per share, required after utilizing the P&L A/c leaving a balance of 1,50,000. Premium on redemption is required to set off against securities premium account.

Repayments on redemption were made in full except one shareholder holding 150 shares due to his leaving India for good.

Assume that calls-in-arrears were received in full. You are required to show the journal entries and the balance sheet of the company after redemption.

 

[C.S. (Inter). Modified]

[Ans: Number of new shares 48,000;
Balance sheet total: 19,15,500]

 

29. The following is the balance sheet of Jyothi Ltd. as at 31 March 2010:

For the year ended 31 March 2011, the Company made a net profit of 30,000 after providing 40,000 depreciation and writing off the miscellaneous expenditure amounting to 40,000.

The following additional information is available with regard to Company’s operation:

1. (The preference dividend for the year ended 31 March 2011 was paid before 31 March 2011.
2. Except cash and bank balances, other current assets and current liabilities as on 31 March 2011was the same as on 31 March 2010.
3. The Company redeemed the preference shares at a premium of 10%.
4. The Company issued bonus shares in the ratio of one share for every five equity shares held as on 31 March 2011.
5. To meet the requirements of redemption, the Company sold a portion of the investments, so as to leave a minimum balance of 60,000 after such redemption.
6. Investments were sold at 90% of cost on 31 March 2011.

You are required to:

1. Prepare necessary journal entries to record redemption and issue of bonus shares
2. Prepare the cash and bank account
3. Prepare the balance sheet as at 31 March 2011 incorporating the above transactions.

[C.A. (Inter). Modified]

[Ans: CRR: 2,00,000: Balance sheet total: 14,20,000]

 

30. The relevant section of the balance sheet of OKAY Ltd. as on 31 March 2011 is as follows:

Liabilities
Share Capital:	24,00,000
Authorized:
Issued & Subscribed:
1,20,000 Equity Shares of 10 Each, Fully Paid Up}	12,00,000
4,500 8% Redeemable Preference Shares of 100 Each, Fully Paid Up}	4,50,000
Reserve & Surplus:
Profit Prior to Incorporation	60,000
Capital Reserve	22,500
Securities Premium	15,000
General Reserve	1,20,000
Profit & Loss A/c	90,000

The pref. shares were due to be redeemed at a premium of 5 %. As the divisible profits were inadequate, the company after completing the legal formalities issued the minimum amount of equity shares of 10 each at a discount of 10%.

All the preference shares were then redeemed. You are required to pass journal entries for all the above transactions.

[Ans: Face value of new issue: 1,83,340; CRR: 1,34,994]

 

31. Following is the balance sheet of Vartika Ltd. as on 31 March 2004:

1. Fully paid preference shares are redeemed at a premium of 5%.
2. 50,000 Equity shares of 10 each are issued at par, whole amount due and received on applications.
3. 1,000 Equity shares on which call @ 2.50 per share is unpaid are forfeited.
4. Final call of 2.50 per share is made and collected.
5. Forfeited shares are re-issued @ 9 per share credited as fully paid.

You are required to prepare:

1. Journal entries
2. Revised balance sheet of company.

[B.Com (Hons). Delhi 2005]

[Ans: Balance sheet total: 21,89,000]

 

32. The balance sheet of M/s G Ltd as on 31 December 2005 was as follows:

The preference shares and debentures were due for redemption on 1 January 2006. M/s G Ltd took the following steps in this regard:

1. It issued 6,000 equity shares of 100 each at a premium of 10 % which were fully subscribed and paid for
2. It sold investments for 2,70,000
3. It arranged a bank over draft to the extent necessary

Give journal entries to record the above and prepare the balance sheet of the company.

 

[B.Com (Hons). Delhi 2006 Modified]

[Ans: Total of balance sheet: 39,30,000]

 

33. The capital structure of Suncity Ltd. consists of 50,000 equity shares of 10 each and 2,000 8% redeemable preference shares of 100 each fully paid up. Undistributed reserves and surplus stood as follows:

Cash and Bank amounted to 1,96,000. Preference shares are to be redeemed at a premium of 10% and for the purpose of redemption, the directors are empowered to make a fresh issue of equity shares at par after utilizing the undistributed reserves and surplus, subject to the condition that a sum of 40,000 shall be retained in general reserve.

Pass journal entries to give effect to the above arrangements assuming that the company could not trace the holders of 100 preference shares.

 

[B.Com (Hons). Delhi 2009]

34.A limited company wants to redeem its 10,000,9% preference shares of 10 each fully paid up at 10% premium. The ledger accounts show the following balances:

 

Securities premium A/c	12,000
Profit & Loss A/c	10,000

The company redeemed the preference shares by making minimum fresh issue of equity shares of 10 each at 5% premium. Calculate the amount of fresh issue of equity shares.

 

[B.Com (Hons). Delhi 2009]

[Ans: 9,000 shares 10 = 90,000]